Does Nevada’s Controversial Net Metering Decision Set a Precedent for the Nation?

What Nevada’s decision could mean for other states

by Julia Pyper February 04, 2016

State utility commissions don't often get mainstream attention. Ratemaking is a complex, math-heavy task that most people are happy leave to regulators.

And yet, the Nevada Public Utilities Commission's recent decision to change the net-metering tariff for rooftop solar customers has turned ratemaking into national news, with both energy experts and everyday consumers weighing in on what the new rules will mean for the future of solar in Nevada and beyond.

The controversy stems from a decision regulators made on December 22. The PUC order tripled the fixed charges solar customers will pay over the next four years, and reduced the credit solar customers receive for net excess generation by three-quarters.

Regulators said the order was designed to make solar customers pay their fair share for use of NV Energy’s grid. Solar companies warned that the changes make rooftop solar economics unworkable.

Shortly after the new rate took effect on January 1, SolarCity, Sunrun and Vivint all announced they would have to cease operations in the state. Local installers have also been forced to cut staff.

The most controversial decision was to apply the changes retroactively to Nevada’s nearly 18,000 existing solar customers, in addition to new ones. Solar companies say the changes erase all savings from going solar, and could actually increase customers’ monthly electricity bills. The backlash has been swift, prompting regulators to reconsider whether the rates should apply to all customers.

The outcome in Nevada sets a potentially worrisome precedent for the solar industry. SolarCity, which serves 60 percent of Nevada’s rooftop market, has seen its stock fall by 37 percent since the new order was approved.

With roughly half of all U.S. states currently studying or changing their net metering policies, there are fears that the decision could prompt regulators around the country to take similar action.

7 options for existing solar customers

Last month, a group of solar customers launched a class action lawsuit against NV Energy alleging the utility "conspired to unlawfully reduce incentives.” Other critics argue that regulators may have violated the contracts clause of the U.S. Constitution for undermining existing agreements between solar companies and electricity customers.

Meanwhile, the PUC said it would heed a request from the consumer protection bureau to review the grandfathering provision. Days later, in an unexpected move, NV Energy announced that it would file a proposal to keep existing customers on the old rates, recognizing the desire for a “stable and predictable cost environment.”

In a filing submitted Monday, NV Energy offered seven options for dealing with existing solar customers, giving the utility a fair amount of negotiating room in the upcoming review. Five of the proposals range from phasing in the changes over four years -- which is the current policy -- to phasing in the changes over eight years, 12 years, 16 years or 20 years. The two other options would delay all changes for 10 years and 20 years, respectively.

“In evaluating these options, the commission should, as it did in the original order, consider the cumulative cost-shifting associated with each option when it balances the interests of all utility customers,” according to an NV Energy official’s testimony. The utility recommended September 10, 2015 as the cut-off date for grandfathering in customers, since that was the last day customers were included under the net-metering cap.

Solar advocates were quick to call the proposal a “bait-and-switch” maneuver. They claim NV Energy’s statement last week suggested the utility would recommend grandfathering over 20 years, not offer a suite of recommendations that includes keeping the status quo.

"NV Energy dangled a carrot in front of its customers last week, but the monopoly isn't actually committed to treating all Nevada homeowners fairly," said Dale Matz, an independent contractor and North Las Vegas homeowner with solar, in a statement from The Alliance for Solar Choice (TASC).

TASC is currently spearheading a campaign that calls on Gov. Brian Sandoval to remove Nevada’s three commissioners -- whom he appointed -- for failing to encourage private investment in renewable energy and diversify the state’s energy resources.

Solar advocates are also taking action through the newly formed alliance No Solar Tax PAC. Last week, the group launched a ballot initiative to amend the law (S.B. 374) that underlies the PUC’s decision. The referendum seeks to repeal language that allowed for the fixed-fee increase and changes to the net metering credit, and keep language that suspends the net metering cap. NV Energy hit the state’s 235-megawatt cap last summer, which triggered the net-metering policy review.

The rate-change forecast: Not so sunny

Nevada regulators maintain that the new net-metering rates are fair. According to the commission’s marginal cost of service study, solar customers are subsidized to the tune of $16 million per year at the expense of other customers. However, that figure that is heavily disputed.

Under the new rates, Southern Nevada solar customers, who make up the vast majority of solar customers in the state, will see their monthly fixed charge increase incrementally from $12.75 to $38.51 by 2020. Over the same period, the net-metering credit will drop from 11 cents per kilowatt-hour to 2.6 cents per kilowatt-hour.

To partially offset the changes, the PUC lowered the per-kilowatt amount that solar customers have to pay by 1 cent over four years. The decision also introduced a time-of-use rate option.

Below is the rate change forecast for Southern Nevada customers through 2020.

The PUC also maintains that it is not necessary to grandfather in existing solar customers, and that all solar customers should be treated as a group. Regulators argue that the changes are fair because many solar customers have already benefited from state incentives, plus they will be slowly transitioned into the new rates over five years.

“Sending a more accurate price and value signal through the revised rate structure…is more important than creating an inaccurate, false sense of stability,” the commissioners argued in their December decision.

Meanwhile, solar customers say the PUC’s order directly undermines incentives the state put in place to entice residents to go solar. In 2012, for instance, Sandoval’s administration implemented a rooftop solar initiative with a $765,000 grant from the Department of Energy. The aim of the program, which recently ended, was to get 20,000 homes to go solar. In addition, SolarCity came to the state in 2013 with a grant from Gov. Sandoval’s Catalyst Fund for economic development.

SolarCity calculates that the new rates could cost existing customers an additional $11,000 over the 20-year life of their systems. One solar customer set up a unique methodology to try to measure the effects.

GTM Research modeled the impact of the rate changes on a rooftop solar customer who signed a power-purchase agreement in 2015 for between 10 cents and 11 cents per kilowatt-hour with a 2.5 percent escalator -- terms that apply to a large number of Nevada customers, based on market data and customer interviews.

Using standard assumptions about the amount of solar a customer self-consumes versus exports to the grid, these rooftop solar contracts will no longer make economic sense starting in 2017.

Customers with a PPA rate below 10 cents per kilowatt-hour could continue to save money for another year or two. But by 2020, almost all solar customers are expected to be paying more per month than if they hadn’t gone solar. Even if a customer owns the system, exports little to the grid and is helped by time-of-use rates, models show that the economics are still undeniably worse because of the higher fixed charges.

Customers place blame

In an interview last month, Nevada resident Dale Matz said that if he had known his savings from going solar would be drastically reduced or erased, “I wouldn’t have done it.”

Most solar customers were sold on the potential to save money. Instead, their bills could actually go up. Yet Nevada customers don’t seem to place blame on the solar companies. They blame the PUC and NV Energy for setting "punitive" rates -- even though the utility insists it never asked for the rates to be retroactive.

Some customers and solar companies believe that NV Energy inappropriately used its influence to get regulators to penalize solar. PUC staff have rejected those claims.

Anne-Marie Cuneo, director of regulatory operations at the Nevada PUC, recently told a local TV station that the accusations were “absolutely shameful.”

Some stakeholders believe the rooftop solar industry hurt its cause by making inflammatory statements about the commission.

One of the biggest misconceptions among solar customers is that NV Energy will benefit financially from the new rule, said Peter Kostes, public information officer at the Nevada PUC.

“As the Order states, NV Energy will not increase its profit through this decision; NV Energy is required to establish a regulatory liability account for any potentially over-collected money to be returned to ratepayers,” he wrote in an email.

But concerns go beyond the new fees on existing solar customers. For some, it’s about choice and diversification.

“I think what [NV Energy] is doing is wrong, and a way to keep a monopoly over what they have,” said Kelly Schwarze, a filmmaker and SolarCity customer. “They hardly do anything from my perspective to innovate, so they have to play catch up, and they don’t like it.”

A national showdown?

The Nevada net metering debate has been framed as an epic battle between billionaires Warren Buffett and Elon Musk. Buffett controls Berkshire Hathaway, which owns the monopoly utility NV Energy. Musk is the chairman and largest shareholder of SolarCity, which is disrupting the traditional utility industry by enabling customers to buy less energy from the grid.

While it makes for a good headline, the two businessmen are not actually battling over energy policy. But the Nevada experience does represent a broader debate over compensating distributed energy -- a debate that is sweeping the country.

Will other states follow in the footsteps of Nevada regulators? Or will they take a more balanced approach?

"I understand because of Nevada, the solar industry is feeling very nervous these days," said Commissioner Mike Florio. "But there was zero chance that California would do something like Nevada. This is not an 'Are you for solar or against solar?' kind of discussion. All of us are pro-solar."

It’s likely that attention will now turn to Arizona, where regulators previously decided that solar customers should pay small monthly fee for their use of the power grid. In March, the Arizona Corporation Commission will consider UNS Electric's proposal to reduce net metering credits by half as part of a general rate case. If approved, the changes would apply retroactively back to June 1, 2015. Hundreds of UNS customers have gone solar since then. Starting in 2014, Arizona rooftop solar customers were required to sign a disclaimer that rates were subject to change.

Arizona regulators are also gearing up for a full value of solar proceeding with hearings scheduled for April. The docket is likely to inform all rate cases to follow.

Does this actually set a precedent?

While grandfathering may not be legally required, there is a precedent for it in regulatory proceedings. Hawaii, which has the highest penetration of rooftop solar per capita in the country, recently approved a new net-metering policy that does not impact customers who have already invested in solar.

Grandfathering is used in other industries too. “As a legal principal, if regulations can be modified with retroactive application, it could have a disruptive effect in any industry,” said Brian Nese, a partner at the law firm Stoel Rives.

Nancy Pfund, a managing partner at DBL Partners, wrote a letter to the Nevada PUC expressing concern. She said the net-metering cuts “send the message that Nevada is not willing to partner with the investor community to meet its clean energy and climate goals, and may even discourage broader private investment in the state.”

Some argue that Nevada solar companies should have done more to warn customers of pending policy changes. On July 31, when NV Energy originally proposed to change net-metering compensation, there were 10,540 interconnected solar systems. On January 1, when the new rates came into effect, there were 17,655 interconnected systems.

Solar companies say they didn’t have any reason to believe that these customers would be negatively affected by the new rates.

"This is unprecedented,” said Lauren Randall, public policy manager at Sunrun. “No state has ever done something as extreme as Nevada."

While some worry that other states will follow Nevada's lead, others believe the controversy might make regulators more cautious.

"Legality aside, the question of whether the Nevada ruling makes it more likely for another state to take on a similar ruling, especially the grandfathering portion, is an interesting question," said Shayle Kann, senior vice president of GTM Research.

"On one hand, a PUC in another state may be more likely to apply retroactive changes if one state has already done so. On the other hand, the painful, protracted battle that is already underway in Nevada (legal challenges, protests, bad press, etc.) should give pause to other states considering a similar decision, as they'll no doubt expose themselves to a similarly difficult process," said Kann.